Sunday, July 19, 2009

How to Make Money on a Falling Stock Without Shorting: Case in Point, Panera Bread (PNRA)

Over the past month I've had fun trading the stock Panera Bread (ticker = PNRA). I've been watching it for quite some time now, getting a sense of it and its trends, before finally diving in a month ago. I flipped it 7 times this past month, making a small gain each time, and all while the stock was going DOWN in general over that time period. I want to illustrate how this is possible and how it's done. I've figured this out, as one of my own trading strategies. I also did this for another stock Unica (ticker = UNCA) in the past, too. I had always wanted to write a little story on that one, but never got around to it. Now it's slightly old news. So I figured I'd write something similar now, but fresh for PNRA, then I can always go back and illustrate UNCA at a later date as well if I want.

I've attached a chart just below I created in Excel showing PNRA over the past month (from June 10 - July 10, 2009). Note the chart just simply "connects the dots" between the prices at the close of each business day. Hence we don't have the granularity we really need to illustrate this properly, but we can still make-do. Just imagine the intraday humps where I've placed my green arrows on the chart (using PhotoShop). Each arrow I've drawn represents one flip I made, that is a buy and sell pair. Some turned out to be faster than others.

If you take a close look (click the chart to enlarge it), you can see I got almost every hump visible in this chart. There are 2 humps I didn't get, but for those, I was able to compensate with 2 other smaller intraday humps that are not visible on this chart. So the reason I missed that first bigger hump (at start of chart) was because I figured it would go up some more first, but then it rather went way down, most likely due to Jim Cramer of "Mad Money" trashing it! So I had to wait for it to go back up again. I wouldn't buy again at the bottom, as I don't want to put too much funds into one stock. I set a limitation on myself that I can't buy more until I sell what I have first. This strategy keeps a consistent investment amount, minimizing risk. And I missed the last hump (at end of chart), as I sold it too fast thinking it was going to go down again. The trend for the week had been down, down, down all along, so I was expecting more of the same. I simply didn't want to take any more chances with the price, and as the market had been falling in general, too. But then PNRA decided to make a quick jump back up again nonetheless, back up into the 50s. That was a surprise.

So my strategy involves attempting to guess the range the stock would be in for a day or small set of days. That is how you make your money. You try to buy at the low of that range, and sell at the high of that range. I never get it exactly right, but that is not expected. If it's close enough, it's good enough. So during the past month, I noticed the range kept going down. First a range of 50s to 51s, then a range of 49s to 50s, then high 48s to 49s. So I kept moving my trades to match the stock's fall as such. You see, a stock is never going to fall straight down. Well, some do, in crashes. But in general, as they move down, there are always usually smaller ups here and there as they go. Call it wavering. It's your job to find those curves, determine ranges from them, then capitalize on that with trades. If a stock falls too much, like if it goes below or close to the bottom of the range it's been in, it's a good time to buy, and when it rises too high, like goes above or close to the top of the range it's been in, it's a good time to sell. It's all about timing.

Oh yeah, there are a couple of caveats. The first is that you have to really watch the stock closely. But if you are at your computer all day long anyway, then this is not that difficult to do. The second is that you will have a lot of trading fees to pay. For the month above, I had 14 trades total. But even taking that into account, I still gained a little bit each time, and those bits add up over time. That said, I still didn't make that much money at all here, but that is only because I traded only 100 shares at a time. This same strategy could always be applied to larger share loads, though, to make a bigger buck. For the general case of assuming no trading fees, my gain on a cumulative basis was 8.93% for the one month. For the case of taking into account my broker's trading fee of $10/trade, my gain was then backed out to 6.11% cumulatively for the month (but still much better than current interest rates of like 1% for the year!). I give both these numbers here, as the former would be more accurate as a limit you'd approach if trading in larger bulk.

Also a big point to notice is that if I had bought at the beginning and held it for the entire month looking for a longer-term gain, I would have LOST money. Go ahead and look at the start and end points of this chart, and you will see what I'm talking about. So longer-term investing is not always all that great, or at least not in this particular case for this time period. Actually, contrast my two numbers above with -4.96%. That is how much PNRA fell during the month above, even including its high jump back up at the end.

So am I going to trade more PNRA and if so, what am I going to buy it at next, you might ask? Well, the answer is NO, or well, not right now anyway. 7 gains at once is too good a record, so I'm "cashing in" at this point. Once you have too good of one thing, it's bound to come back and bite you in the face if you get too greedy. I've already learned that the hard way for other stocks which I won't get into here. Now I originally had said to myself that I would keep flipping PNRA until I lost once, but even now I'm rethinking that. If it does go significantly down, though, then of course I will have no choice but to jump back in.

Note that all my analysis above was really based solely on trends and my feelings about how the stock would move. The only exception to that was my entry point, where the stock had just gotten upgrades to "BUY", yet at the same time dropped a bit! That was my signal to jump in. Besides that, there wasn't much significant news for this stock over the past month at all, and definitely not any earnings reports or anything like that. That state is actually good in a way, though, as then the stock becomes more predictable, believe it or not. Without heavy news to send it way up or way down, it just kind of sits there, floating in little waves. These are the waves you want to catch.

And of course, another more obvious way to make money from a falling stock is to short it. But my method here is more safe, as shorting means going against the general market trend over time, which is UP.

I figured I'd write and share this article as a fun thing, and if any readers have other stories of similar successes or future successes due to this article, please pass them back to me as well.

Happy trading.

Update 7/20/09 2:30 AM...

And of course, now the stock has changed from a week ago as well. It has shot up even more, closing this past Friday at 53.58. Right now, it's the wee hours of early Monday morning, before the pre-market open. I wanted to get this article out before anything else happens! It's unfortunate about having this week delay in my article posting. See my next posting for an explanation of this. I haven't traded PNRA anymore since, though, and despite my "long-term gain loss" point above becoming a little silly here now, my analysis for this particular set of 30 consecutive days as originally intended does still hold on its own nonetheless.

Copyright © Matt Soscia, MS9, and, 2009. All Rights Reserved. Unauthorized use and/or duplication of this material, both text and images, in any form or medium, without express and written permission from this blog’s author and owner is strictly prohibited. No commercial or reproduction rights are granted. Excerpts and links may be used, provided that full and clear credit is given to Matt Soscia, MS9, and with appropriate and specific direction to the original content. This article is available for publishing in your newspaper, magazine, or other periodical, either online or in print. Please contact me for licensing arrangements. Thanks.

1 comment:

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